August 28, 2008 / 5:39 PM / 12 years ago

UPDATE 1-LUKOIL says Arctic field will reverse output slide

(Adds comments on tax breaks)

By Tanya Mosolova

SOUTH KHYLCHUYU, Russia, Aug 28 (Reuters) - LUKOIL’s new Arctic oilfield will enable the No. 2 Russian producer to avoid a decline in output this year, but the company’s head said on Thursday more tax cuts are needed to revive flagging production.

LUKOIL (LKOH.MM) President Vagit Alekperov said Russian oil firms had requested the government triple the level of tax breaks from the more than $5 billion promised for next year to help fund complex projects in the Arctic and remote parts of Siberia.

“Oil companies believe about 400 billion roubles ($16.3 billion) in additional investment will be required in the oil and gas sector in 2009. Unfortunately, the government has confirmed only 130 billion,” Alekperov said.

“Dialogue will continue. I’m sure those projects being realised by other companies — Surgut, Rosneft — are very complex projects that demand colossal investment,” he told reporters at LUKOIL’s new South Khylchuyu field.

Oil output in Russia, the world’s largest exporter after Saudi Arabia, fell in the first half of the year for the first time in a decade. Maturing fields in West Siberia, little financial incentive for greenfields and a heavy tax burden have stunted growth.

South Khylchuyu, 2,000 km (1,000 miles) northwest of Moscow in the Nenets region, will produce 2.151 million tonnes of oil this year — enough to sustain growth at LUKOIL in 2008.

The field, owned 70 percent by LUKOIL and 30 percent by U.S. major ConocoPhillips (COP.N), is expected to produce 7.5 million tonnes per year, or more than 150,000 barrels per day, in 2009. It has proven reserves estimated at over 500 million barrels.

“When we took on this project, there was an array of problems,” Alekperov told reporters at the field, 40 km (25 miles) from the stormy Barents Sea.

“When we started there was no airport, no roads...And it freezes over for 11 months of the year.”

LUKOIL, in which ConocoPhillips has a 20 percent stake, has spent over 100 billion roubles ($4.07 billion) so far developing South Khylchuyu and expects the field to produce for 30 years.

The field, one of the largest in the Arctic region of Timan-Pechora, will be operated by a joint venture between LUKOIL and ConocoPhillips, Naryanmarneftegaz.

“We’re grateful to the government for the law which gives new opportunities to produce oil in Timan-Pechora. Our joint venture Naryanmarneftegaz will receive around $500 million (in tax breaks) over the life of the project,” Alekperov said.

But he added bigger tax cuts were needed industry-wide.

“I hope the statesmen hear us and work with us.” (Writing by Amie Ferris-Rotman and Robin Paxton, editing by Anthony Barker)

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